Online marketplace funding to grow slower, valuations may rationalise in near term, reveals recent report

Venture capital investments into online marketplaces have suffered a 68 per cent drop this year from the record highs of 2021. Funding activity is expected to continue at a slower pace and valuations are likely to get moderated in the near term, reveals a report by Bain & Company and Accel.

Annual marketplace investments decreased to $4.5 billion in the first 10 months of 2021 compared to $14 billion in the same period last year.

The report titled “The Rise of Digital Bazaars in India” said dealmaking is likely to become more measured and valuation multiples will see some degree of rationalisation as investors focus more on unit economics, proven models, and founders who are able to balance growth and profitability.

Investors have doubled down on the marketplace model for the past few years. Deal volumes in the digital marketplace space doubled in 2021 while average deal value tripled to $80 million from 2020. Between 2018–2021, deal values have more than quadrupled, growing from $3.5 billion in 2018 to $16 billion in 2021 and number of deals doubled from around 100 deals in 2018 to 200 in 2021.

Business-to-consumer (B2C) e-commerce, business-to-business (B2B) e-commerce, and online food delivery were among the highest-funded marketplaces sectors, together accounting for close to 60 per cent of total funding received in the last 5 years.

Public markets are expected to stay muted in the near term, driven by global uncertainties (such as inflation and supply chain disruptions) and lower investor confidence, the report said. Given the underwhelming performance of equity markets, Indian e-marketplaces considering listing are likely to wait out for market recovery.

Led by B2C e-commerce marketplaces, online marketplaces in India contribute more than $100 billion in gross merchandise value (GMV). B2C marketplaces account for nearly $50 billion of the overall GMV.

The report anticipates that the marketplaces sector is expected to more than triple, to reach $350 billion in GMV in next five years.

As per the report, there are over 300 funded marketplaces in India across multiple categories like retail, education, healthcare, travel, financial services, of which 20 have reached more than $1 billion in GMV.

“More than 1/3rd of large outcomes in our start-up ecosystem have been marketplaces and contribute to more than $100 billion in GMV. We (Accel India) have invested more than $700 million in these companies, and continue to look for more such opportunities,” Anand Daniel, Partner at Accel and co-author of the report, said.

Online marketplaces will create $400–$500 billion in enterprise value, contribute more than 5 per cent to India’s GDP, enable over 15 million micro, small, and medium enterprises (MSMEs) to grow their businesses online, and create 7 million jobs by 2027, the report predicts.

B2C e-commerce is expected to dominate online marketplaces with 40 per cent of the total GMV in 2027, while B2B e-commerce marketplaces GMV is slated to grow by five times its current size to reach $55 billion. Online food delivery will be the third largest marketplace vertical which is anticipated to triple in size to reach nearly $22 billion by 2027.

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